Currently, our everyday financial transactions rely upon a trusted third party to maintain a record of transactions. For example, when you do a bank transaction, the banking system keeps a record & guarantees that the transaction is safe & reliable.
Likewise, when Cindy transfers $5 to Steve using PayPal, PayPal maintains a central record of $5 dollars debited from Cindy’s account and $5 credited to Steve’s. Intermediaries like banks, PayPal, and other members of the current economic system play an important role in regulating the world’s financial transactions.
However, the role of these trusted intermediaries also has limitations:
Unfair value capture. These intermediaries amass billions of dollars in wealth creation (PayPal market cap is ~$130B) but pass virtually nothing onto their customers – the everyday people on the ground, whose money drives a meaningful proportion of the global economy. More and more people are falling behind.
Fees. Banks and companies charge large fees for facilitating transactions. These fees often disproportionately impact lower-income populations who have the fewest alternatives.
Censorship. If a particularly trusted intermediary decides that you should not be able to move your money. It can place restrictions on the movement of your money.
Permissioned. The trusted intermediary serves as a gatekeeper who can arbitrarily prevent anybody from being part of the network.
Pseudonymous. At a time when the issue of privacy is gaining greater urgency, these powerful gatekeepers can accidentally disclose — or force you to disclose — more financial information about yourself than you may want.
Bitcoin’s “peer-to-peer electronic cash system,” launched in 2009 by an anonymous programmer (or group) Satoshi Nakamoto, was a watershed moment for the freedom of money. For the first time in history, people could securely exchange value, without requiring a third party or trusted intermediary. Paying in Bitcoin meant that people like Steve and Cindy could pay each other directly, bypassing institutional fees, obstructions, and intrusions. Bitcoin was truly a currency without boundaries, powering and connecting a new global economy.
Introduction To Distributed Ledgers
Bitcoin achieved this historical feat by using a distributed record. While the current financial system relies on the traditional central record of truth. The Bitcoin record is maintained by a distributed community of “validators,” who access and update this public ledger. Imagine the Bitcoin protocol as a globally shared “Google Sheet” that contains a record of transactions. Validated and maintained by this distributed community.
The breakthrough of Bitcoin (and general blockchain technology) is that, even though the record is maintained by a community. The technology enables them to always reach a consensus on truthful transactions. Ensuring that cheaters cannot record false transactions or overtake the system. This technological advancement allows for the removal of the centralized intermediary, without compromising transactional financial security.